RBI optimistic on the state of economy

The Diwali gift from Reserve Bank of India (RBI) is an optimistic report on the state of the economy in its October monthly bulletin. ‘India is likely to be among the few emerging economies that would be left standing after the global hurricane has passed’, it says. As all of us do this day, it looks at the brighter side of life. 

The RBI says that broader economic activity has remained resilient and poised to expand further. Domestic demand is accelerating, with auto sales having rebounded, real estate sales on the rise in spite of higher borrowing costs and the contact-intensive hospitality services bouncing back. 

Bank credit is increasing by double digits and the sustained surge in goods and service tax collections is signalling growing formalisation of the economy. Indian equities are outperforming both advanced and emerging peers. Selling by foreign portfolio investors is being more than matched by domestic institutional investors’ buying. Corporate and bank balance sheets have become fortified through the period of the pandemic.

For now, reasonably strong macro fundamentals are being tested by the twin whammies of rising international interest rates and a strengthening US dollar. This is inflicting collateral damage – imported inflation and Indian Rupee depreciation. Despite such turbulence, the consensus seems to be that real GDP growth in India will clock 7 per cent or close to it in 2022-23, says the RBI.

The report notes some recent developments that inspire this confidence. First, introduction of 5G technology is likely to be a game changer for Indian manufacturing and services sector with high data speed, low latency, high quality video services and highly reliable communications. 5G can also generate significant social benefits in terms of tele-surgeries and real-time monitoring of disasters, precision agriculture, minimising the role of humans in dangerous industrial operations such as in deep mines, offshore activities and the like. Second, the National Logistics Policy launched last month aims to lower the cost of logistics to best international standards, increase the competitiveness of Indian products at home and abroad and increase efficiency across all sectors of the economy, thereby boosting value addition and enterprise. Third, 75 digital banking units in 75 districts of the country will provide banking services and products in an efficient, paperless, secure and connected environment on a 24X7X365 basis in self-service mode, promoting financial inclusion and financial literacy.

The RBI does flag downside risks due to aggressive rate hikes and forward rate guidance by the central banks of the advanced economies, prolonged geopolitical conflicts, amplified energy and food price shocks, supply side disruptions, persistent inflation and so on.  

It gives the figures of exports of goods and services without any perceptive comments but says that looking ahead, India is poised to consolidate and accelerate the recovery over the rest of the year. It supports the optimistic outlook with its economic activity index, several high frequency indicators, and data on festival induced uptick in demand and rebound of the contact intensive sectors and says that easing of inflation will inject confidence, recharge animal spirits and investment and improve competitiveness of India’s exports.  The report ends approvingly quoting the Managing Director of International Monetary Fund that India deserves to be called a bright spot on this otherwise dark horizon.

On that happy note, I wish all readers a Happy Diwali.

email:tncrajagopalan@gmail.com